Beneficiary Designations – Post-Divorce Financial Pitfall

Change beneficiary designations on insurance and retirement accounts immediately after divorce.

Without exception, our clients want to move on with their lives as quickly as possible after they complete the financial negotiations of their divorce. Moving on includes taking control of their own finances. There is a long list of things to do in order to take control of post-divorce finances that are beyond the scope of this article (We would be happy to send you a guide via e-mail if you request.) Our best suggestion is to enlist the services of an experienced Certified Divorce Financial Analyst® (CDFA™) professional before the divorce is final to ensure that the final agreement does not have negative long-term consequences for the client.

We regularly engage with clients to complete these items and there is one simple (to us) but infuriating (to clients) road-block that almost all face: changing or naming beneficiaries in the event of the client’s death. The first steps after divorce should include opening new retirement accounts; in most cases, this will be an IRA. New account paperwork for an IRA contains a section for  beneficiary designations: the party who would inherit the account funds in the event of the account owner’s death. While married, most people want their spouse to inherit the funds in their retirement accounts; after divorce, however, the last thing they want is for their former spouse to inherit the funds in their retirement accounts should they pass on. They will often want to change beneficiary designations to their children or siblings.

Not so fast, though. If you live in a community property or marital property state, your client will need to obtain a signed consent from their current spouse to name someone else as beneficiary. In fact, most financial institutions require a spousal consent for a non-spouse beneficiary designation regardless of where the IRA owner resides. Experts believe this is simply a policy protection from beneficiary-related litigation for custodians.

Depending on a number of factors – including the divorce agreement – retirement savings accounts such as IRAs and 401Ks may require your client’s former spouse to remain the beneficiary even after they have reached agreements around the division of assets.

Planning Consideration: Timing

Many people will negotiate the date on which they will take status as single individuals for tax or other purposes. Waiting until January 1st of the year following the separation may be mandated by state-instituted waiting periods, income tax planning, insurance eligibility, or any number of other practical financial considerations. This complication provides a perfect example of an unintended consequence of negotiations: if a specific status date is negotiated into an agreement, it may have unintended consequences on a client’s financial future.

Here’s an example. The final divorce agreement for our client, Jane Smith, was filed with the court on June 30, 2012. Part of her agreement with her ex-husband, John, says they will take status as single individuals on January 1, 2013. This was done because the couple’s tax preparer advised them that they could save $2,000 in federal taxes by filing their tax return married jointly for the current year (2012).

From the federal government’s perspective, the couple remains married for the whole year – even though they have completed their financial settlement.

The agreement awards 50% (~$600,000) of John’s 401K account to Jane via a Qualified Domestic Relations Order (QDRO). In order to receive the funds, we are opening a Rollover IRA account in advance of the QDRO in Jane’s name. This way, we can tell the 401K plan administrator exactly where the funds should go and avoid any potential hiccups in the transfer process. Remember that state law, federal law, or custodian policy requires an individual name their spouse as beneficiary of retirement funds, and our client is not yet officially divorced. As CDFA professionals experienced in the intricacies of account transition, we will inform Jane that she has three options to remedy the situation and at least one to make it worse:

  1. Obtain the former spouse’s signature on a Spousal Consent for the new account paperwork. John must effectively agree to allow Jane to name her children as the beneficiary of the funds she was just awarded in the divorce.
    1. Client Quote: “You mean I just spent 18 months and $50,000 fighting over this money and I still need his permission to do what I want with my money?!”
    2. Practical Consideration: What if the relationship has deteriorated to the point where John refuses to agree to the change in beneficiary? It may cost thousands of dollars in attorney fees to force her to do so.
    3. Practical Consideration: What if Jane doesn’t want John to know who her financial advisor will be post-divorce?
    4. Name the former spouse as beneficiary temporarily. In really bad circumstances, when a couple no longer communicates at all, it may be advisable to simply name the former spouse as beneficiary with the intent of modifying this as soon as the judgment is final.
      1. Client Quote: “You mean we have come all this way and I have to keep him as my beneficiary and he will inherit my money if I die?!”
      2. Practical Consideration: What if we decide to postpone but somehow forget to change the Beneficiary Designation once the judgment is final? Does the judgment awarding the 50% to Jane protect her?
      3. Practical Consideration: What if something happens while the judgment is pending? Who inherits Jane’s money?
      4. Delay the transfer of funds. QDROs take time: the QDRO cannot be carried out until the final judgment is signed by a judge, and it is rare to see a QDRO completed in close proximity to a judgment of dissolution.
        1. Client Quote: “But you said ‘Taking Control Now’ was the most important part of my financial transition after the divorce! Now you are telling me to wait?! Wait for what?!”
        2. Practical Consideration: So what is the harm in waiting?  Our major concern is the management of investments inside of the account. When transfers are delayed, the funds are often managed by the former spouse or by an investment advisor my client has explicitly chosen not to work with. I recently had a client tell me they would never invest in such a risky asset as the Facebook Initial Public Offering (IPO). Imagine her shock when I showed her the most recent account statement for her joint brokerage account and her investment advisor had purchased 3,000 shares of Facebook in the IPO! The advisors used by a couple during marriage are rarely appropriate for both parties – particularly the woman – to work with after a divorce. Either they will be aligned with one party, unfamiliar with the specific needs of a newly-divorced woman, or unable to provide the necessary services. On top of that there is often a lack of trust. Without trust, an investment advisor has no business working with an individual.
        3. Practical Consideration: I have seen investment accounts lose half of their value during dissolution proceeding. Guess who gets blamed for the losses? Usually the former spouse – which means the client may not trust anything they have to say and turn into thousands of dollars of additional unnecessary discovery efforts.
        4. Practical Consideration: We may want to obtain Authorization and Consent from the former spouse for our client to take over managing her portion of the funds.
        5. Ignore the problem. We certainly would not recommend this option – and we would also be remiss if we failed to mention the ramifications of doing so.
          1. Client Quote: “He has been jerking me around and lying to me for years. What is the worst that could happen?”
          2. Practical Consideration: We actually don’t know what the ramifications would be of disobeying from a legal perspective.
          3. Practical Consideration: We do know if no spousal waiver has been obtained, the default plan beneficiary will be the participant’s spouse, even if he is not the named beneficiary. US District Courts have affirmed this. In this particular case, John – not Jane’s chosen beneficiaries: her children – would inherit the retirement funds if Jane should pass.
          4. Practical Consideration: There is a bit of uncertainty and disagreement amongst experts whether these rules are equally as hard-and-fast with IRA accounts as they are with 401K accounts. The presence of uncertainty makes experienced financial advisors plan for the worst-case scenario, so ignoring the precedent is never presented as an option for our clients.


The financial transition following divorce offers the opportunity for clients to remake their financial lives in a way that supports their ongoing comfort, security, and dreams. Most importantly, it offers the opportunity to take control of their finances as a single individual and throw off the constraints of a power-struggle now terminated by a judgment of dissolution.  The complications of such simple things as paperwork, as evidenced above, can have prolonged and lasting effects on your clients’ lives when the power-struggle continues after the financial agreements are reached. Enlisting the services of an experienced CDFA professional during the process will help ensure your clients obtain the most financially advantageous settlement possible and support their financial independence far beyond divorce negotiations.

At Wellspring Divorce Advisors we are experts and international leaders in the field of Divorce Financial Planning. Contact one of our advisors today for an experienced and professional guide through your post-divorce transition and help considering your beneficiary designations.

3 Reasons You Need Financial Guidance During Divorce


1. If you don’t have kids or they have grown up; the ONLY thing there is to argue about in a divorce is money.

2. The financial decisions made during your divorce will very likely be the biggest and most difficult you will ever make set amid the most emotionally chaotic time of your life.

3. The decisions you make today will affect your financial safety and security for the rest of your life.



Beware Stock Redemption for Small Business in Divorce

small business, divorce financial analyst

Many of my clients own small businesses which bring a mountain of complications to the financial negotiations of divorce. From cash flow analysis to business valuation to perquisite incomes to ownership interests, the existence of a small business in a family net worth statement brings challenges and opportunities. One of the challenges becomes apparent when a couple wants to negotiate for one party to be awarded a business as part of the divorce settlement.

Here’s an example

Steve and Martha co-own a business we will call Divorce, Inc.. During the marriage Steve ran the business, was the face to all of the sales meetings and was generally known as the business man of the family. Martha had the idea for the business but preferred to stay behind the scenes and manage employees. Steve and Martha have always owned the 100 shares of stock 50/50. During divorce negotiations it became obvious that they were not going to both continue working in the business and so one should by the other’s interest. Since Steve was the face of the business and Martha had already set her heart on doing other things it was decided Steve would buy Martha’s interest in Divorce, Inc. at a total community property value of $2,000,000 after an appraisal was completed. There are a couple of ways to facilitate this transaction. This is where it becomes sticky.


  1. Divorce, Inc. will write Martha a check for $1,000,000 to buy her 50 shares from her.
  2. Martha will be keep other community assets (house, tax affected retirement accounts, brokerage account) worth $2,000,000 to offset the value of Divorce, Inc..
  3. Divorce, Inc. will purchase Martha’s 50 shares of stock over time at set prices based on an agreed upon stock buy-back plan.
  4. Steve will purchase Martha’s 50 shares of stock over time at price and on a timeline delineated in an agreement.
  5. Steve will purchase all of Martha’s 50 shares today by structuring a promissory note to be paid over time.
  6. Structure a buy-out payment over time to be payable as spousal support from Steve to Martha.


The result?

As you can tell you have options if you are negotiating the sale of a business interest pursuant to your divorce. Litigating your divorce removes many of these options as a judge is unlikely to create a situation that requires the couple to remain attached for long periods of time after the divorce. This means options #3 and #4 are thrown out. If there are no significant other assets in the estate option #2 goes away. If there is not a significant cash position on the books of the corporation option #1 goes away leaving only option #5. A court is not really allowed to be creative which rules out most of these on it’s own.

Each of these options also has complicated tax considerations to be incorporated when deciding how to structure a buy-out. Many tax professionals believe the only way to guarantee a clear understanding of how a tax court would rule is to ask for a private ruling. Some believe structuring a transfer of the stock inside of the Section 1041 six year requirement covers you. What is fairly clear is that forcing a Divorce, Inc. to purchase shares from Martha would result in some form of a taxable event so it may be best to consider options involving immediate offset with other assets or structuring a collateralized promissory note. Consult with your Divorce Financial Planning expert and Tax expert before deciding what works best for you before making a decision.



wellspring divorce advisors

Wellspring Divorce Advisors helps individuals and couples address the financial aspects of divorce in a civilized, equitable, and efficient manner by providing expert divorce financial planning and advice.

Contact us to find out how we can help you through this process.

Divorce and Taxes: How they can affect your financial future

taxes, divorce financial analyst

Taxes are guaranteed to be a complication of every divorce financial settlement. Misunderstanding the tax code, even worse completely ignoring it, can have devastating effects on your financial future.

The errors get more costly and more common when estates and incomes get larger and people start getting creative. Negotiating a creative and mutually beneficial divorce financial settlement can be complicated when you have significant assets and income. Make sure you and your attorney have the help of a financial expert skilled and experienced in navigating the tax codes of divorce. Here are some common errors.


Failure to consider the value of dependency exemptions and filing status for income taxes. High earners are often phased out of using dependency exemptions, failure to negotiate the use post divorce could waste tax dollars.


Child Support

Not understanding the difference between child support and spousal support for tax purposes. Spousal support is taxable to the recipient, tax deductible for the payer.


Spousal Support

Structuring future changes in spousal support in close proximity to an event or mile-stone related to your children. This is also known as the Child Contingency rule and could cause tax deductible spousal support payments to be re-classified as non-deductible child support.


Attorney Fees

Failure to deduct attorney fees related to spousal support dispute as a miscellaneous itemized deduction. Yes your attorney fees are deductible to the extent they were incurred in the process of seeking tax advice or spousal support. You will need to ask your lawyer for an itemized break out of the litgiation costs. This can be incredibly valuable in protracted, expensive litigation.



Running afoul of Section 1041 of the internal revenue code. Section 1041 is the IRS code that allows spouses, married or divorcing, to transfer assets to one another without tax consequence. There are however rules to follow like how ling you have to complete a transaction.


Incorrect Assumptions

Assuming your CPA understands the tax code related to divorce. They can certainly look things up but it is a bad idea to assume your CPA understands the tax intricacies of divorce. The last time I spoke to a California Society of Certified Public Accountants group there were 200+ CPA’s in the room and 200+ questions after the presentation.



wellspring divorce advisors

Wellspring Divorce Advisors helps individuals and couples address the financial aspects of divorce in a civilized, equitable, and efficient manner by providing expert divorce financial planning and advice.

Contact us to find out how we can help you through this process.

Are More Women Paying Child Support and Spousal Support?

The quick and easy answer is yes. Both in statistics as well as our experience.

The American Academy of Matrimonial Lawyers (AAML) released a statement with a rather catchy opening sentence. “This Mother’s Day, it appears that an increasing number of mom’s will be setting aside time to sign child support and alimony checks.”

The key to note is that they are signing the front of the check, not the back. 56% of the AAML fellow attorneys said they have seen an increase in mothers who pay child support and women in general paying spousal support.

As our society progresses the social norms are changing and stay-at-home fathers are becoming more common. I personally support the family’s right to choose what is best for them and whoever is more inclined to be in the work force should be. It is encouraging to also see income in-equality becoming less of a concern as well.

I have seen an increase in women writing the support checks in my practice too and I am here to report the female support check writer is every bit as troubled about writing the child support or spousal support check every month as her male counterpart. In fact I might say even more troubled by having to write that check every month. Maybe this piece of the social norm shift hasn’t caught up yet. The stigma on men receiving spousal support or child support payments seems to be alive and well.